BPK5E PRACTICAL AUDITING UNIT I - V · • Detection and prevention of frauds- Embezzlement of...

BPK5E

PRACTICAL AUDITING

UNIT I - V

TM

BPK5E-PRACTICAL AUDITING 2

UNIT I – SYLLABUS

INTRODUCTION

Meaning of Auditing

Distinction between Auditing & Accounting

Objectives of Auditing

Classification of Auditing

Types of Audit

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AUDITING

The Institute of Chartered Accountants of India describes auditing as

“the independent examination of financial information of any entity,

whether profit oriented or not, and irrespective of its size or legal form,

when such examination is conducted with a view to expressing an

opinion thereon”.

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https://youtu.be/WRd41wnPfG8

Follow the link below for further explanation

DISTINCTION BETWEEN

ACCOUNTING & AUDITING

https://youtu.be/WRd41wnPfG8

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AUDIT FRAMEWORK

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I) Main Objective : Expression of expert opinion.

II) Secondary Objectives :

• Detection and prevention of errors - Error of omission, Error of

Commission, Error of Principle, Errors of Duplication

• Detection and prevention of frauds- Embezzlement of cash,

Misappropriation of goods, Fraudulent of manipulation of accounts.

III) Specific Objectives:

• Review of Operations

• Performance Management Policy

• Cost records

OBJECTIVES OF AUDITING

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BPK5E-PRACTICAL AUDITING

CLASSIFICATION OF AUDIT

7


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TYPES OF AUDIT


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I. STATUTORY AUDIT – Determines whether an organization is providing

a fair and accurate representation of its financial position by examining

book keeping records.

II. CONCURRENT AUDIT – Examination of financial transactions at the

time of happening or parallel with the transaction.

III. STOCK AUDIT - Refers to the physical verification of the inventory.

Involves the counting of physical stock presenting the specified premises

and verifying the same with computed stock maintained by the company.

IV. COST AUDIT – Verification of cost accounts and check on the adherence

to cost accounting plan.

TYPES OF AUDIT


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V. SECRETARIAL AUDIT – To Check compliance of various legislations

including the Companies Act and other corporate and economic laws

applicable to the company.

VI. CAG AUDIT - Audit of government accounts (including the accounts of

the State Governments) in India. Involves auditing all expenditure and

revenues from the Consolidated Fund of the Union or State

Governments, whether incurred within India or outside India.

VII. MANAGEMENT AUDIT – Assessment of methods and policies of an

organization’s management in strategic planning and employee

improvement.

TYPES OF AUDIT -Contn….

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UNIT II – SYLLABUS

INTRODUCTION

Audit Planning

Audit Programme

Audit Notebook

Audit Working Papers

Internal Control

Internal Check

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Audit Planning is a planned performance, meaningful and well-covered

reporting and with a sense of time, cost and above all quality.

Auditing and Assurance Standard (AAS1) states that the auditor should

plan his work to enable him to conduct an effective audit in an efficient

manner.

Benefits of Audit Planning:

Appropriate attention to important areas.

Potential problems promptly identified.

Time bound progress and completion

Man power utilization.

Coordination of work of auditor and experts.

AUDIT PLANNING


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AUDIT PLANNING

CONTN…


For further explanation, follow the link:

https://youtu.be/0vYNjrBgWKM

https://youtu.be/0vYNjrBgWKM

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AUDIT PROGRAMME

Audit Programme is a plan of action translated into specific areas of

audit works with check list of actions to be performed.

Entails specific listing of audit area components in terms of related

procedures.

Specifies the time or date by which the work should have been

completed.

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A written record of queries made, replies received thereto,

correspondence entered into etc.

Audit notebook is maintained by the audit clerk.

Also known as Audit Memoranda.

Great help to the auditor for preparing audit report.

Examples of notes made in the audit notebook:

28-8-2016 Receipt for Rs.10000 paid to Messrs. XYZ vide C.B.Folio

69, not available.

2-2-2017 Receipt for Rs.25000 paid to Messrs. XYZ, seen and

cancelled.

AUDIT NOTEBOOK

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AUDIT WORKING PAPERS

• Working Papers are the medium through which the auditor

expresses his technical knowledge of accounting principles and

procedures.

• Serves as proof of how the relevant evidence was obtained,

analyzed, examined and pieced together.

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OBJECTIVES OF WORKING PAPER

• Planning, organisation and review of audit work.

• Support for Auditor’s opinion.

• Basis for review and revision of internal control.

• Basis for evaluation and training of audit staff.

• Division of Labour.

• Use as permanent record.

• Bridge between original transactions and financial statements.

• Basis for further work.

Contn…..

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• Means a plan of organization laying down appropriate division of

functional responsibilities, and a proper authorization and record of

business transactions.

INTERNAL CONTROL

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TECHNIQUES OF INTERNAL

CONTROL SYSTEMNARRATIVE RECORD – Complete written description of the internal control

system, employed in a small business.

QUESTIONNAIRE METHOD – Contains a set of questions, the answers to

which provide an insight into the internal control system.

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FLOWCHART METHOD- Internal control system is depicted with the help

of symbols, figures and code references with minimum narration.

Contn……

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Arrangement of book-keeping routine to prevent errors and frauds.

A continuous internal audit carried on by the staff itself.

Methods of internal check includes Self-balancing ledger system, time-

recording clocks regarding wages.

OBJECTIVES

Proper division of work.

Fixation of responsibility.

Minimisation of errors and frauds.

Early detection of errors and frauds.

Reliability of books of accounts.

Early preparation of final accounts.

INTERNAL CHECK

INTERNAL CHECK

FOR CASH

CHECKING OF ALL CASH TRANSACTIONS SHOULD BE GIVEN

UTMOST IMPORTANCE BECAUSE IT IS HERE EMPLOYEES MAY

BE TEMPTED TO COMMIT FRAUD


ATTENTION PAID BY THE

AUDITOR

INCOMING MAIL UNDER SUPERVISION

COMPARISON OF CASH RECEIPT WITH MAIN DOCUMENT

CROSSING OF CHEQUES

REGULAR CHECKS OF PAY-IN-SLIP

CHEQUES SHOULD BE PRINTED AND SERIAL NUMBERED


A 'not negotiable' cheque can be deposited into the account of the

named payee or the account of the presenter if the words 'or bearer'

appear.

Contn……


1. Payment by cheque

checking of payment and receipt

All the payment should be by cheque

Unused cheque – books

Persons responsible for preparing cheque

The relevant bill or invoice should be stamped

only authorised person should signed

Specific instruction


Specimen of BRS


Petty cash payment

Petty cash book should be maintained as per the imprest system

It should be written up daily

Payment should be made only on the properly approved

voucher

All paid voucher should be filed.


Accept orders and supply clearly specified

Senior official to grant credit facility

Incoming orders serially numbered


The person authorized for examining the despatch of goods

should not be among those in charge for stock maintenance

and invoicing.

Well established procedure for regular comparison of records

of goods despatched.

Invoices should be prepared in triplicate and billing is to be

done correctly.

• Quantities, price, discounts, totals in the invoices is to be

clearly earmarked.

• Two copies of invoices send to the customer of which a copy

is received back with his signature as a proof of receipt of

goods.

• Sales to be recorded in the goods outward book

Contn……


• Proper procedure followed for goods sent on approval, sales return,

free of charge etc.

• Goods returned by customers are to be entered in a separate

register along with the reason for the return of goods.

• Issue of credit notes for goods returned by customers should be as

per an established procedure and authorised by senior official.

Contn……


• Issue of credit notes for price adjustments, errors in invoices,

special allowances should be authorised by a senior official.

• Goods already despatched should not form part of the inventory

records of the preceding accounting period

• Authority for solving queries rest with a senior person

• There should be control accounts as regards debtor’s ledger.

Contn……


• The purchase cycle should begin with the placing of a requisition by a responsible person with the purchase department

• Maintenance of requisition forms received from various departments.

• Letter of inquiry to be sent to the suppliers for quotation of the price, freight and delivery terms.

• Place orders with selected suppliers and copies of order to be send to accounts, stores department.

• The procedure relating to receipt, inspection, acceptance and transfer of the goods to concerned departments, should be clearly laid down.

Contn……


• Receipt of goods should be recorded in the goods received register

and a copy to be send to related departments.

• Inspection of goods received is done with the assistance of the

department which has requisitioned the goods.

• The purchase department should check with the order and goods

received note, upon receipt of the suppliers invoice to ensure the

rate,discount,quality, etc of the goods are exactly as earlier agreed.

• Necessary particulars of the purchase to be recorded in the

purchase register and number of order to be marked on the invoice.

Contn……


• the accounts department should not make any payments to the supplier

unless the invoice has been passed and verified by a authorised person.

• If advance amount is been paid to supplier against the order, deduction is

made from the bill and the net amount is paid.

• Goods received should be entered in respective stores ledgers. From there,

the relevant entries should be passed in stock (bin) cards.

• In case of rejection of goods for being defective or any other reason, they

should be returned to supplier and should not be entered either in the stores

or bin cards.

• For the goods returned to the supplier, credit note should be obtained from

him, failing which a debit entry should be passed in his individual account.

Contn……


• When goods are partly returned the items to be registered on the bin

cards should be that of accepted goods. Goods received note

should be prepared accordingly.

• In such a case the bill is passed only for the value of goods actually

accepted or a fresh bill is demanded from the suppliers.

• If the supplier has overcharged for items, a credit note may also be

obtained from him.

• All incoming credit notes should be numbered and stamped the

same way as invoices. These should be checked with the advice

note covering the return of rejected goods to the supplier

Contn……


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UNIT III – SYLLABUS

VOUCHING & VERIFICATION

Vouching

Trading Transactions

Vouching of Cash receipts & Payments

Vouching of Outstanding Assets and Liabilities

Verification & its process

Valuation of assets and liabilities

Distinction between assets & liabilities

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Meaning : Vouching is an examination of the ledger entries in which the

entries are supported by documentary evidence.

It Includes an inquiry into the genuineness of the transaction, accuracy of

the amount involved and proper posting in the relevant accounts.

VOUCHING

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Vouching of Trading transactions should be preceded by a thorough

evaluation of the existing system of internal check and control.

Involves careful enquiry into the policies and procedures relating to

authorisation as to:

Ordering of goods.

Receipts and inspection of goods.

Return of defective goods.

Processing of invoices for payment.

VOUCHING OF TRADING

TRANSACTIONS


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Purchase Transactions

Invoices should be addressed to the client.

Date and amount of invoice should be checked with its record in

Purchase book.

Invoices should be signed by the Authorised clerk

All purchases in the preceding weeks should be recorded in the

Purchase book at the end of relevant financial periods.

Castings and carry forwards in the purchase book should be carefully

checked.

After an invoice has been vouched, it should be “cancelled”.


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Entries in the Sales Day Book should be checked with the duplicates of

sales invoices and originals of customers orders.

Entries in the Sales Day book should be checked with postings to Sales

Ledger.

Must ascertain whether goods represented as sales in the books of

account have been actually sold.

Amount of Sales tax should be shown in separate column in the Sales

Day book.

OTHER TRADING BOOKS

The auditor should check the:

Consignment Book, Bills Receivable book, Bills Payable book, Purchase

Ledger and Sales ledger.

SALES TRANSACTIONS


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CASH SALES

Cash memos are to be printed.

It should be in quadruplicate.

COLLECTION FROM DEBTORS

Copies of sales invoice.

Settlement of accounts received from debtors.

RENT RECEIPTS

Rent agreements.

Counterfoils of rent receipts.

INCOME FROM INVESTMENTS

Dividend/interest warrants received.

Certificates showing purchase of shares.

Vouching of Cash Receipts


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LOAN RECEIVED

The loan agreement.

The sanction ticket issued by the lender.

BILLS RECEIVABLE

Verify the bills receivable book, cash book and bank statement.

Verify if any bills are dishonored.

SALE OF FIXED ASSET

Fixed asset register.

Sale Agreement.

ROYALITIES RECEIVED

Verify the due date of royalty, rate of royalty etc.

Verify the calculation of recoupment of short working.

Contn…..


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PAYMENT TO CREDITORS

Purchase return notes.

Receipts issued by creditors.

WAGES & SALARIES

Wage sheet and Time cards, piece rate card, job card etc.

Salary acquaintance roll and Appointment letters of top executives.

ACQUISITION OF ASSETS

Verify title deed of the seller.

Non encumbrance certificate by the seller.

Agreement of sale and the sale deed.

VOUCHING OF CASH

PAYMENTS


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PAYMENT OF INCOME TAX

Verify the statement prepared to calculate the advance tax.

Ensure that the advance tax is paid within due date.

ASSETS ACQUIRED UNDER HIRE PURCHASE

Description of assets.

Cost of the assets.

Hire purchase charges.

ADVERTISEMENT EXPENSE

Verify the vouchers relating to advertisement expenses.

Copy the advertisement should be enclosed with the payment voucher.

ACQUISITION OF ASSETS

Verify title deed of the seller.

Agreement of sale and the sale deed.

Contn…


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VOUCHING OF

OUTSTANDING ASSETS

AND LIABILITIES

Outstanding

Outstanding

LiabilitiesOutstanding

Assets

Unearned Income

Unpaid Expenditure

Accrued Income

Prepaid Expenses


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I) OUTSTANDING LIABILITIES:

UNPAID EXPENDITURE

Employee stock options and deferred compensation plans.

Contingent liabilities.

UNEARNED INCOME

Subscriptions.

Advance in respect of sale of goods/ services.

II) OUTSTANDING ASSETS:

PREPAID EXPENSES

Prepaid advances or commission to employees.

Deferred revenue expenditure.

ACCRUED INCOME

Interest and dividend.

Contn….


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48

Means “providing the truth” or “confirmation”.

Involves the following points:

Comparing the ledger accounts with the balance sheet.

Verifying the existence of assets on the date of balance sheet.

Satisfying that they are free from any charge.

Verifying their proper value.

VERIFICATION


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LEASEHOLD LAND

Leasehold land is subject to diminution in value.

Depreciation should be provided (write off total cost).

BUILDING

Building should always be valued at cost less depreciation at a

reasonable rate.

Depreciation to be provided even building is not under use.

PLANT & MACHINERY

Plant & machinery is valued at cost less depreciation at reasonable rate.

Necessary adjustments for additions or sales should be appropriately

made.

VALUATION OF ASSETS


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GOODWILL

Goodwill to be valued by the specified method.

Calculation of normal profit.

INVENTORIES

Value Raw materials, Finished goods and Goods on consignment.

VERIFICATION OF LIABILITIES

TRADE CREDITORS

Verify the purchase ledger.

Verify creditor’s schedule of the management with the statement of accounts.

DEBENTURES

Verify debenture trust deed & debenture a/c.

Verify debenture redemption reserve a/c and the authorisation in the Articles

of Association.

Contn…


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INCOME RECEIVED IN ADVANCE

Verify the schedule of incomes received in advance and confirm these are

fully disclosed in the Balance sheet.

According to Sec 418, a company is required to make the payment of the

PF dues by the due date i.e within 15 days from the date of deduction from

salaries.

CONTINGENT LIABILITY

Inspection of minutes book of meetings of the board of directors.

Inquiry and discussions with the staff of the company.

Contn….

https://youtu.be/XrnbqfrZHYI

For further explanation, refer the link below

https://youtu.be/XrnbqfrZHYI


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DISTINCTION BETWEEN

VERIFICATION & VALUATION


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I) Under Law of Agency – Failing to comply with Provisions, the auditor is

liable to a fine upto Rs.1000 provided the default is wilfull.

II) Under Statute (Misfeasance):

Under Companies Act,1956 – The auditor shall be punishable with

imprisonment for a term which may extend to seven years and shall

also be liable to fine for any breach of duty.

Under Indian Penal Code – If the auditor signs any certificate which is

false, he shall be punishable with an imprisonment for a period of two

years and a fine.

PENAL PROVISIONS


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Contn…


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For further explanation, follow the link below

www.taxmann.com/.../NFRA%20Draft%20National%20Financial%20Reporting%20

A...

http://www.taxmann.com/.../NFRA Draft National Financial Reporting A

http://www.taxmann.com/.../NFRA Draft National Financial Reporting A


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UNIT IV- SYLLABUS

Appointment, procedure, eligibility and qualifications of auditors

Powers and Duties of auditor

Rotation and Removal of auditor

Resignation of auditor

Remuneration of auditors

Auditor's responsibility and liabilities towards shareholders board

and Audit committee

Restriction on other service


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Section

Reference

Description

Sec 224 Appointment and remuneration of Auditors

Sec 224 A Appointment of auditor by special resolution

Sec 225 Removal, resignation of auditor and giving of special notice

Sec 226 Eligibility, Qualifications and disqualifications of auditors

Sec 227 Powers and Duties of auditors

Sec 228 Audit of accounts of any branch office of a company

Sec 229 Signature of audit report

Sec 230 Reading & Inspection of auditors report

Sec 231 Rights of auditor to attend general meeting

Sec 232 Penalty for non compliance with sec 225 to 231

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LIST OF SECTIONS UNDER

COMPANY LAW


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APPOINTMENT OF AUDITOR1. Appointment of first auditor

[sec 224(5)]

2. Appointment by company, i.e.,

shareholders [ sec 224(1)]

3. Reappointment of auditor [sec

224(3)]

4. Appointment by central Govt.

[sec 224(3)]

5. Appointment in case of casual

vacancy [sec 224(6)]

6. Appointment by special

resolution (Sec 224A)

7. Appointment of auditors of

govt. companies(sec 619)

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ELIGIBILITY & QUALIFICATION OF AN

AUDITOR SEC 226

1. Practicing Chartered Accountants with his

individual capacity

2. Deemed to be in practice

3. Holding certificate of practice & a partner of

charted accountant firm.

4. Offers to performs the services involving the

auditing or verifications of financial institution

books, records , accounts , verification or

certification of financial accounting

https://vakilsearch.com/advice/role-of-auditor-company/

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DISQUALIFICATION OF AUDITORS

SEC 226(3),(4) AND (5)


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DUTIES/RESPONSIBILITIES OF COMPANY

AUDITORS


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DUTIES OF COMPANY AUDITORS1.Statutory duties : Certifying report as to vital matters, Reporting the

members , Enquiring into specific matter, Assisting investigation , Assistant

Public Prosecutor, Certifying directors insolvencies, Signing report in the

prospectus, Certifying accounting standards

2.Common law: Representing client on tax matters, Offering advise in

company law matter , Conducting inter cost, Performing managerial activity

3.Professional ethics : Responsibilities, Public Interest , Standard of care,

Integrity, honesty &Engagement duties

4. General duties : Ensuring trust fullness of financial statement , Taking

reasonable care , Arriving at independent opinion , Reporting violation,

Ensuring in case of doubt


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1. Right of access to books, accounts and vouchers (sec 227(1))

2. Right to obtain information and explanations (sec 227(1))

3. Right to receive notice and to attend general meeting(sec 231)

4. Right to indemnified

5. Right to report to members

6. Right to sign audit report

7. Right to visit branches

8. Right to have legal and technical advice

9. Right to receive remuneration

10. Right of lien

RIGHTS AND POWERS OF AUDITOR


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REMOVAL OF AUDITOR

https://www.icsi.edu/portals/0/AUDIT%20AND%20AUDITORS.p

df

https://www.icsi.edu/portals/0/AUDIT AND AUDITORS.pdf

https://www.icsi.edu/portals/0/AUDIT AND AUDITORS.pdf


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RESIGNATION OF AUDITOR


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REMUNERATION OF AUDITORS

1. The remuneration may be fixed at

General Meeting.

2. The auditor remuneration may be

fixed by the appointing authority

board or the Central Government .

3. The remuneration is inclusive of all

expenses allowed to him.

4. He may be paid remuneration for

services rendered in any other

capacity such as advisor in

taxation matter, management

services etc.


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Statutory liabilities

Liabilities for misstatement in prospectus

False statement in return and in the report

Liability for false statement upon examination by the

official liquidator

Delinquency

Destruction, Alternation and Manipulation

Liabilities under chartered accountant act

Liabilities under special Act

Banking Regulation Act 1949

Insurance Act 1956

Indian Penal Code

Income Tax Act

Consumer Protection Act 1986

AUDITOR'S LIABILITIES & RESPONSIBILITIES


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Civil liability on account of Misfeasance

Criminal liability

For misstatement in prospectus

Liability penalty for false statements

Failure to assist in an investigation

Other liabilities

Liability to third party

Liability for unlawful act of the client

Liability for unaudited statement

Liability resulting from negligence of audit assistance

Liability to Articled clerks

AUDITOR'S LIABILITIES & RESPONSIBILITIES

CONTN…..


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Audit Report

EDP Audit - Meaning

Division of auditing in EDP environment

Impact of computerization on audit approach

CAAT

Audit around with computers

Procedure of Audit under EDP system

UNIT V-SYLLABUS


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AUDIT REPORT PREPARATION & PRESENTATION

Basic elements of the Report

1. Title

2. Addressee

3. Identification of financial statements

4. Reference to auditing standards and

practices

5. Opinion on the financial statements

6. Signing of Audit Report

7. Address of the Auditor

8. Dating of the report

9. Place of signature

10. Reading and inspection of auditor’s report

Types of Audit Report

1. Clean Report

2. Qualified Report

3. Disclaimer

4. Negative Report


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EDP AUDIT


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APPROACHES TO EDP AUDITING

Approach to EDP

Auditing

Auditing Through

the computer

Auditing Around the Computer

Auditing with the

Computer


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FEATURES OF AUDITING THROUGH

COMPUTER SYSTEM

Real Time Processing

Online Data Entry

Elimination of printouts


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CHARACTERISTICS OF AUDITING THROUGH

THE COMPUTER

Organizational Structure

Nature of Processing

Design and Procedural Aspects


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NATURE OF PROCESSING

TRANSACTION TRAIL OR AUDIT TRIAL

Documentation

(voucher ,invoice etc.)

• First Recognition Of Transaction

Prime Books of Account (Day Book, Journal etc.)

• Chronological Classification

Principal Books(Ledger, etc.)

• Classification by Nature

Financial Statements

• Output


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INTERNAL CONTROL IS AN AUDITING

THROUGH THE ENVIRONMENT

Internal control

Accuracy

Completeness

Non-redundancy

Asset safeguarding

Existence of audit trail

Authenticity


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CLASSIFICATION OF CONTROL PROCEDURE

1.General CIS (Computerized Information System) Control

Organizational Control

System design , Programming, Operation, Data Maintenance

System development & documentation control

Documentation, Pilot testing, File Conversion

Access Control

Hardware Control

Diagnostic control, Parity check, Dual read,

Echo check, Control over file retention,

Environmental control, Error routine

2. CIS Application Controls

Input Control

Processing Control

Output Control

Transaction Control

Master file Control


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PROBLEMS IN EDP ENVIRONMENT

1. Absence of supporting vouchers

2. Lack of visible audit trial

3. Vulnerability to manipulation

4. Garbage in garbage out

5. Storage problem

6. Coding problem

7. Computer frauds

8. Computer virus


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ADMINISTRATIVE CONTROL

(Operators, Files, Input)

DIVISION OF RESPONSIBILITIES

1. Operator should not have access to the documents containing original

data. They should not have access to clerically maintained financial

records.

2. Operators are not to be authorised to alter any data.

3. Access to the computer room and to the computers should be restricted

to authorised persons only.

4. Operating instructions should be provided in a manual.

5. The work schedule should be strictly adhered to.

6. There should be atleast two operators per shift.

7. The duty timings should be frequently changed among the operators.

8. A log is to be maintained for each operator as to time and usage of

computers.


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ADMINISTRATIVE CONTROL

(Operators, Files, Input)

CONTN…..DIVISION OF RESPONSIBILITIES

Only correct files should be used.

No files should be used for unauthorised purposes.

Access should be allowed only for authorised persons by the use of

passwords

To ensure physical security, copies of important file should be stored

in a different place.

Adequate reconstruction procedure should be made available to

save the corrupt files.

Only corrected data is entered

Data is entered only once

Data is converted correctly into machine readable form.


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COMPUTER ASSISTED AUDIT

TECHNIQUE


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IMPACT OF COMPUTERIZATION ON

AUDIT APPROACH

1. Feasibility study

2. Size and nature

3. Planning and installation

4. Unforeseen circumstances

5. Training and exposure to employees

6. Software and hardware should be reliable

7. Flexible

8. Scope and limitations of the package

9. Organization change –Facilities, Staffing, Centralization of data and

segregation of duties

10.Methods of authorization

11.Visibility -Input data, Processing, Transaction trail


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PROCEDURE OF AUDIT

UNDER EDP SYSTEM

Get Electronic Data

Data Conversion

Compliance Test

Substantive Test

Reporting

http://smallbusiness.chron.com/explain-audit-procedures-electronic-data-

processing-audit-14715.html

http://smallbusiness.chron.com/explain-audit-procedures-electronic-data-processing-audit-14715.html















BPK5E PRACTICAL AUDITING UNIT I - V · • Detection and prevention of frauds- Embezzlement of...

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